I am planning on buying an investment property next month. My realtor told me that once the closing is done, I should get the property transferred to an LLC.He mentioned that it will not cost much and I could get some tax benefits as well. He asked me to check with CPA/mortgage companies as well.
My question is:
Since I dont have an LLC as of now, is it OK if I close in my name and then transfer the property to an LLC. What happens to the mortgage/title/insurance in this case? Wont this amount to double closing? Also is it true that it wont cost much if we are transferring the wonership to an LLC.
Or
Shall I open an LLC now and ask the mortgage company to lend to LLC. (Not even sure if that is possible since it will be a newly formed company).
If you are looking to purchase the property in the name of a LLC you will need to get financing through your local bank. However, they will not finance 100% of the appraised value. Possibly 80% and they may have their own set of seasoning guidelines.
Now as far as titling the property into an LLC. This can become very tricky. I do recommend that you speak to a real estate attorney in your state as legal issues will vary.
If after refinancing the property in your individual name, you then transfer to a LLC, this could trigger the “Due on Sales Clause” This means if the lender finds out, they could require the entire balance to be paid off in 30 days. Many investors do not care as they will chance this. Not many lenders currently are looking for these title changes. As interest rates rise you may see lenders be more aggresive so that clients are forced to refi. I suggest you research LLC in the “asset protection, legal” threads.
Some mortgage consultants have made arrangements with lenders to allow investors to title into a LLC at closing - for purchases or refinancing. Thus they do not have to worry about quit claiming and triggering a due on sales clause.
I will explain what several of my clients do though. They use a land trust. A land trust will be set up after closing on the refi with you as the beneficiary. When sent to your lender for review they generally have no issues as long as you are the beneficiary. After they have reviewed my clients then assign the beneficiary to their LLC. The assignment is an unrecorded document so only the investor is aware of the change. These land trust may not be effective or legal in all states and they will cost more to set up.
To address your concerns about how many properties to put into each LLC. I have heard from several investors that they hold 1 property in each LLC. This can run up quite a bill so others may add 2 or 3. Some do not even set up a LLCs till they have multipe properties or $500,000 -$1M in equity. They get umbrella insurance policies instead.
If you are looking to purchase multiple properties then getting them out of your individual name may become neccessary. As I mentioned before, once the LTVs are down to 75-80% you can take then to a bank to get financing.
I think you need to research the LLC on your own and not just take the Realtor’s advice out-of-hand.
If you’re going to buy and hold investment property then you probably do need an LLC (or some other entity) at some point. This, however, is for asset protection and not for tax purposes. In general, LLCs are “pass through” entities. The LLC allows you to protect your private assets (your house and car, etc.) from your business assets (your rental properties)…
I would discuss it with your CPA and your RE attorney. Make sure you understand and do it for the right reasons! Here, you can do an LLC for about $300 total.